Postdoctoral Fellows Tax Update
July 30, 2010
T2202A Update
After a lengthy delay, Canada Revenue Agency ("CRA") has responded to the University's requests for clarification regarding the income tax status of PDFs. CRA's response is contained in a document called a "technical interpretation" that is dated June 22, 2010. The letter sets out CRA views as to the tax status of PDFs for years prior to 2010, and in particular the years 2006-2009.
For some time, there has been considerable uncertainty in the academic community as to the income tax status of PDFs. A number of PDFs have asked the University of Toronto to issue T2202A tax forms so that they could claim the potential tax benefits that are associated with these forms. In order for the University to issue valid T2202A forms, a number of legal requirements must be satisfied. In particular, a recipient of a T2202A must be a student who is enrolled in a "qualifying educational program", as defined in the Income Tax Act.
In 2008, the University's tax advisors contacted CRA to ask if it would be possible to obtain an "advance income tax ruling" regarding the income tax rules that apply to PDFs. An advance income tax ruling is binding on both CRA and the taxpayers involved. CRA replied that they were not prepared to issue a binding ruling regarding the PDFs, apparently because of the significant nature of the factual determinations that would be involved. Page one of the CRA technical interpretation notes that our tax advisor's request for a binding ruling was declined.
In 2008, CRA did indicate that they were prepared to issue a "technical interpretation" regarding PDFs and educational institutions. Technical interpretations are intended to provide taxpayers with general guidance regarding tax issues. Technical interpretations are issued on a "no-names basis" and they are not binding on taxpayers or the CRA.
The University's tax advisors submitted a written request for a technical interpretation to CRA in November of 2008. This request included submissions to the effect that PDFs should be eligible to receive T2202A forms. Our submissions also asserted that non-teaching stipends paid to PDFs could qualify as tax exempt income pursuant to the exemption for "scholarships, fellowships and bursaries" that is contained in subsection 56(3) of the Income Tax Act. CRA refers to this provision as the "scholarship exemption".
CRA considered the matter for over 18 months before issuing a written response. The apparent reason for this delay was that the income tax treatment of PDFs raised significant policy issues that required extensive internal consultation within the Federal Government.
Notwithstanding the lengthy delay, the June 22, 2010 technical interpretation does not contain any definitive conclusions regarding the tax status of PDFs. The document states that the income tax treatment of each PDF is a question of fact that must be determined on a case by case basis taking into account all of the relevant facts of the individual's situation.
The general guidance from CRA that is contained in the June 22, 2010 technical interpretation indicates that CRA does not accept that PDFs qualify for the scholarship exemption for the years 2006-2009. First, CRA states that it does not generally consider PDFs to be "students" as that term is used in the Income Tax Act. The letter also states that even if a PDF was a student who was entitled to the education tax credit, "in many or most cases" the income received by the PDF will not be entitled to the scholarship tax exemption because "it will not be sufficiently connected to an educational program for which an educational tax credit is available". The letter also notes that PDFs could also be ineligible for the scholarship exemption because they may be employees or recipients of research grants.
It seems that the technical interpretation is directed at the broader Canadian academic community , including institutions whose PDF programs may be materially different from the University of Toronto's own program. The CRA document contains assumptions and observations that were not raised by the University of Toronto or its tax advisors and that appear to be drawn by CRA from other sources. The University of Toronto wishes to point out that CRA's views regarding PDF programs in general do not necessarily apply to the University's own PDF program.
Page 4 of the CRA letter states that "We can confirm that where the tax return of a post-doctoral fellow is reviewed by the CRA, a claim for the full scholarship exemption will generally be denied." Again, this seems to be a general comment that applies to all Canadian PDF programs, regardless of their specific legal structure. The possibility of an adverse reassessment should not be a concern for University of Toronto PDFs since the University has not issued T2202A's for the years 2006-2009.
As indicated in the CRA letter,the 2010 federal budget expressly precludes PDFs from claiming the scholarship exemption for years after 2009.
In view of the contents of the technical interpretation, and in particular CRA's statement that it will generally reassess PDFs to deny the full scholarship exemption for the years 2006-2009, the University of Toronto has concluded that it would not be appropriate to issue T2202As to PDFs for 2009 or any prior taxation years.
Due to the 2010 amendment, as described above, the University will also not be issuing T2202As for 2010 or subsequent years.
Please note that the University is not in a position to provide legal or tax advice to individual PDFs and all interested parties are urged to consult their own professional tax advisors.
March 30, 2010
Budget 2010 Changes to the Scholarship Exemption and Education Tax Credit for Postdoctoral Fellows
The federal Government has announced in their 2010 Budget the following changes to the Scholarship Exemption and Education Tax Credit:
“Budget 2010 (under “Scholarship Exemption and Education Tax Credit”) proposes to clarify that a post-secondary program that consists principally of research will be eligible for the Education Tax Credit, and the scholarship exemption, only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree (or an equivalent degree). Accordingly, post-doctoral fellowships will be taxable.”
This will apply to the 2010 and subsequent taxation years
The University of Toronto has requested a technical interpretation of the income tax treatment of postdoctoral fellows from the CRA for 2009 and prior tax years.
This page will be updated as soon as new information becomes available.